Navigating Canada’s ‘Foreign Buyers’ Ban’: Impact and Implications

Introduction of the ‘Foreign Buyers’ Ban’ and its Amendment

In December 2022, the Privy Council approved regulations for the Prohibition on the Purchase of Residential Property by Non-Canadians Act. Published on December 21, 2022, in the Canada Gazette, these regulations became effective on January 1, 2023, alongside the Act. The Act and the Regulations, in place from January 1, 2023, to December 31, 2024, restrict non-Canadians from purchasing residential property in Canada.

This legislation has stirred debates due to its far-reaching implications. They prohibit not only non-Canadian individuals but also foreign-controlled entities from buying vacant or developed residential-zoned land, affecting commercial development and Real Estate Investment Trusts (REITs). Leases, mortgages, and shares are also classified as purchases, impacting contracts for builders and suppliers.

In response, Minister Ahmed Hussen introduced four amendments on March 27, aimed at striking a balance. Effective since March 27, 2023, these revisions expand exceptions, enabling non-Canadians to purchase homes under specific circumstances. They emphasize the importance of Canadian housing for those seeking to establish roots in the country and discourage speculative foreign investments.

Definitions

1. Understanding Non-Canadian Status and Exceptions

The Act applies to non-Canadians, including corporations and entities not listed on a Canadian stock exchange, and controlled by non-Canadians. It does not apply to Canadian citizens, permanent residents, or temporary residents who meet the exception criteria outlined in the Regulations.

Non-Canadians are individuals who do not fall into one of the following categories:

• Canadian citizens,
• Permanent residents of Canada,
• Persons registered under the Indian Act.

Non-Canadians also include corporations and entities that:

• Are formed under Canadian federal or provincial laws,
• Are not listed on a Canadian stock exchange,
• Are controlled by non-Canadians.

Certain exceptions allow non-Canadians to purchase residential properties in specific circumstances. It’s important to be aware that in some regions, such as in parts of British Columbia and Ontario, additional property transfer taxes may apply to foreign buyers. Notably, property transfer taxes fall under provincial legislation, while the Purchase of Residential Property by Non-Canadians Act and Regulations are federal laws. Consequently, these regulations are distinct and do not share the same exemptions. Regarding the prohibition on the purchase of residential properties, the following groups of individuals are exempt:

1. Non-Canadian individuals who purchase residential property jointly with their spouse or common-law partner, provided that the spouse or common-law partner is a Canadian citizen, a person registered under the Indian Act, a permanent resident, or a non-Canadian for whom the prohibition does not apply.

2. Temporary residents under the Immigration and Refugee Protection Act, who meet specified conditions, including:

1.  Temporary residents studying in Canada, if:

• They are currently enrolled in an authorized study program at a designated learning institution, as defined in the Immigration and Refugee Protection Regulations.
• They have submitted income tax returns for each of the five taxation years preceding the year in which the property purchase is made.
• They have been physically present in Canada for a minimum of 244 days in each of the five calendar years preceding the year in which the purchase was made.
• They have not previously purchased a residential property in Canada while the prohibition is in effect.
• They purchase a property for a price not exceeding $500,000.
  

2. Temporary residents working in Canada, if:

• They hold a valid work permit or are authorized to work in Canada.
• They have 183 days or more of validity remaining on their work permit or work authorization at time of purchase.
• They have not previously purchased a residential property in Canada while the prohibition is in effect.
  

3. Protected persons under subsection 95(2) of the Immigration and Refugee Protection Act, including individuals who have been granted refugee protection or are protected persons under the Immigration and Refugee Protection Act.
   
4. Individuals who have made an eligible claim for refugee protection under subsection 99(3) of the Immigration and Refugee Protection Act, if:
   1. They have submitted a claim for refugee protection in accordance with the Immigration and Refugee Protection Act, and this claim has been determined as eligible and referred to the Refugee Protection Division; or
   2. They have been granted temporary resident status under the Immigration and Refugee Protection Act based on humanitarian public policy considerations to provide a safe haven to those fleeing conflict.
      
5. Foreign nationals holding passports with valid diplomatic, consular, official, or special representative acceptance issued by the Chief of Protocol of Canada.’

6. Foreign nationals with valid temporary resident status, whose temporary resident visa was issued, or their temporary resident status was granted by a justified exemption under section 25.2 of the Immigration and Refugee Protection Act.

7. Section 35 Rights – Indigenous People and Communities: Section 35 recognizes and confirms the existing Indigenous and treaty rights of Indigenous peoples in Canada. These rights may include ownership of land, rights to occupy and use land and resources, land reserved for First Nation use, self-government rights, and cultural and social rights. The Regulations make it clear that the prohibition does not apply when it conflicts with the rights recognized and affirmed by Section 35 of the Constitution Act, 1982.”

2. Understanding ‘Residential Property’ and Exceptions

The Prohibition on the Purchase of Residential Property by Non-Canadians Act defines residential property as structures containing up to three dwelling units or parts of buildings, such as semi-detached houses or condominium units. Larger buildings with four or more dwelling units are not subject to this prohibition.

The Regulations specify that the prohibition applies to residential properties located in Census Metropolitan Areas (CMA) or Census Agglomerations (CA) as identified in Statistics Canada’s Standard Geographical Classification 2021. Non-Canadians can freely purchase residential properties situated outside of Census Metropolitan Areas (CMA) and Census Agglomerations (CA).

Both CMAs and CAs are composed of one or more adjacent municipalities centered around a population center or core. A CMA must have a total population of at least 100,000, with 50,000 or more residing in the core, while a CA must have a core population of at least 10,000.

Effective from March 27, 2023, Section 3(2) of the regulations was repealed, allowing non-Canadians to purchase vacant land zoned for residential and mixed use, and utilize it for any purpose, including residential development.

Special Considerations

• Housing Cooperatives (“Co-ops”): When purchasing within a housing cooperative, the buyer technically acquires shares in an association incorporated under the Cooperative Association Act. The cooperative remains the owner of the lands and building(s). Housing cooperatives generally own buildings with more than three dwelling units, which are not individually owned. Thus, housing cooperatives do not fit the Act’s definition of residential property. However, the reasons for their exclusion are not entirely clear, and industry consensus remains pending.

• Leasehold Properties: The Act applies to leasehold properties, including those on First Nations lands. A leasehold interest in a dwelling unit satisfies the Act’s criteria for both “purchase” and “residential property,” without exception.

• Modular and Mobile Homes: The Act applies to modular and mobile homes that are affixed to land. The determination of whether a modular or mobile home is affixed to land, rather than considered personal property, involves legal and factual analysis, and this determination relies on whether they were intended for temporary or permanent affixation to the land.

3. Defining ‘Purchase’ and Exception Scenarios

The Prohibition on the Purchase of Residential Property by Non-Canadians Act applies to both direct and indirect acquisitions of residential property. However, there are specific scenarios where the prohibition does not apply, including:

1. When an individual obtains an interest in a residential property resulting from a divorce, separation, gift, or death.
2. When a non-Canadian leases a dwelling unit for the purpose of occupying it; in other words, the act of renting and occupying a dwelling unit does not qualify as a purchase.
3. When a creditor enforces a security interest or secured right as part of a financing agreement, which may include actions like seizing and foreclosing on a residential property.
4. When a non-Canadian acquires residential property for the purpose of development.

4. Definition of “Control”

When the initial ban was introduced, a privately held company was categorized as non-Canadian if 3% or more of its ownership was controlled by a foreign entity. This stringent criterion had adverse consequences for the development sector, hampering developers’ capacity to undertake residential projects. It proved particularly burdensome for developers with partial non-Canadian ownership and for real estate investment trusts (REITs). REITs, which manage, own, or finance income-producing real estate, pool the resources of numerous investors, providing individuals with dividends from real estate investments without requiring them to purchase property directly.

Now the threshold for foreign control of private corporations and entities, including REITs, has been increased to 10% with the amendment effective since March 27, 2023. Note that publicly traded corporations and entities are excluded from the ban. In addition, the purchasing of residential property for the purposes of development is also exempt from the ban, regardless of whether the corporations and entities are privately held or publicly traded.

For the purposes of the prohibition with regards to privately held corporations or entities formed under the laws of Canada or a province and controlled by a non-Canadian, the Regulations now define “control” as:

• Direct or indirect ownership of shares or ownership interests of the corporation or entity representing 10% or more of the value of the equity in it or carrying 10% or more of its voting rights.
• Control in fact of the corporation or entity, whether directly or indirectly, through ownership, agreement or otherwise.

Other Key Amendments and Their Impact

1. Foreign buyers ban no longer applies to purchasing for the purpose of development.

The recent amendments to the Prohibition on the Purchase of Residential Property by Non-Canadians Act introduce a significant exception that allows non-Canadians to purchase residential property for the explicit purpose of development. Notably, this exception is no longer limited to publicly-traded corporations, providing a broader scope for foreign investment in development initiatives. According to the Canada Mortgage and Housing Corporation (CMHC), ‘development’ encompasses activities that go beyond leasing or renting, and some expansions or remodels that transform a property, creating a new residential unit, are now permissible. This exemption extends to publicly traded entities formed under Canadian laws and controlled by non-Canadians.

While the amendments offer a welcomed flexibility, it’s essential to note that they don’t specify the type of development or activities constituting development. CMHC guidance suggests a broad interpretation, but routine repairs, renovations, or modifications may not qualify. House flipping, characterized by acquiring property for renovation and resale, remains unlikely to be permitted under this exemption.

This change is particularly advantageous for developers with foreign ownership or equity, fostering opportunities for projects such as demolishing existing properties for new construction or acquiring adjacent residential properties for larger-scale development.

2. Foreign buyers ban no longer extends to (the majority of) commercial real estate properties.

The original Regulations inadvertently classified urban land zoned for residential or mixed use as “residential property,” impacting many commercial assets like office buildings and shopping centers. Amendments have eliminated this classification, offering greater flexibility for most commercial real estate transactions. However, certain considerations remain, such as farmland within census areas, which may still be subject to the Act if it contains habitable structures. It’s crucial to scrutinize commercial transactions involving interests in farmland or traditional residential real estate to ensure compliance.

3. Foreign buyers ban now excludes publicly traded Canadian REITs (and other non-corporations).

The amendments address a significant loophole by clarifying the status of publicly traded Canadian Real Estate Investment Trusts (REITs) and other non-corporations listed on major Canadian stock exchanges. The original definition of “non-Canadian” failed to include language specific to publicly-traded non-corporations, potentially classifying them as “non-Canadian” based on even minimal foreign ownership. The amendments rectify this, offering a clear exemption for publicly traded corporations and entities formed under Canadian laws and listed on designated Canadian stock exchanges. However, it’s essential to note that publicly-traded entities formed under foreign laws still fall under the “non-Canadian” category, emphasizing the importance of jurisdiction in this legislation.”

Conclusion: Balancing Affordability, Investment, and Development in Canadian Real Estate

The introduction of Canada’s ‘Foreign Buyers’ Ban’ and its subsequent amendments mark significant efforts to strike a balance between fostering homeownership for Canadians and encouraging foreign investment in the country’s real estate sector. These measures reflect the noble goal of making housing a place to live, not just an investment asset for foreigners.

While the ban seeks to address the housing affordability crisis, its efficacy has stirred debates. Critics argue that non-Canadian buyers represent only a minority in the housing market, and the root causes of rising prices lie in the inadequate supply. This contention is supported by the New Zealand experience, where a similar ban led to a marginal decrease in foreign buyers but failed to halt soaring home prices.

Alan Walks, an urban planning and geography expert, adds that the ban may be more political theater than sound policy, citing data from Vancouver showing that foreign buyers constituted a mere one percent of all home purchasers.

In conclusion, Canada’s housing ban emphasizes the need for a multifaceted approach to address housing affordability. While foreign investment is a part of the equation, the real drivers of housing prices may lie elsewhere. These measures serve as a reminder that addressing housing challenges requires comprehensive solutions that encompass supply, demand, and economic factors, rather than focusing solely on foreign buyers. Striking the right balance remains an ongoing challenge as Canada works to ensure accessible housing for its citizens while promoting investment and development in the real estate market.